We
just finished another great quarter, driven by strong profit performance in
software and services, and share gains in both hardware and software.

This
quarter our revenue was up sequentially, and our growth rate improved vs.
second quarter. We expanded gross margin
by almost 2 points and pre-tax margin by over 3 points year to year. Our earnings per share is up 18 percent to
$2.40. In addition, we generated $3.4
billion of free cash flow, up almost $1.3 billion year to year, and ended the
quarter with $11.5 billion of cash on hand, while reducing our debt by $4
billion since June.

We
now expect to deliver at least $9.85 of earnings per share for the year, up 15
cents from our previous view of at least $9.70.

When
you look at the third quarter as compared to the second quarter, though
earnings per share growth is the same, both up 18 percent, we extended our
share gains this quarter.

For
instance, in software we gained almost 3 points of share in WebSphere, where we
compete head-to-head with Oracle. We
also gained share in Information Management, Tivoli, and Rational. These share gains drove 5 points of constant
currency growth in branded middleware revenue.

In
hardware, we gained 5 points of share in System p, and 2 points of share in
System x. Thats lot of share  and were
taking it from both Sun and HP. These
share gains drove the improvement in our hardware revenue growth rate, which is
11 points better than last quarter.

Revenue
growth from our services business was fairly consistent with second quarter,
but the real story here was our ability to deliver double-digit profit growth
by continually expanding margins. This quarter
our services pre-tax margin was almost 15 percent. On a comparable basis our services margin is
better than any of our key competitors.
And, believe me, were not done.

Overall,
with an improving trend in revenue performance, weve continued to generate
profit growth through margin expansion.

Over
the last several years, we have been shifting to higher value areas, and
significantly changing our mix of business.

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At
the same time, our ongoing focus on driving productivity in all areas of the
business is reducing our fixed cost base and improving the operational balance
point.

We
continue to expect about $3.5 billion of cost and expense savings this year
from the structural actions weve taken.
And remember, weve got a spend base of almost $90 billion to work, so
weve got a lot of opportunity to continue to reduce structure and make our
business more efficient.

The
impact of our transformation on this quarters profitability is clear and compelling. Our combined services segment pre-tax margin
was up 2.4 points year to year, and in software, we grew segment pre-tax profit
by over 20 percent, and margin by over 6 points. For the year, we continue to expect to
generate about $8 billion of profit in software, and $8 billion in services.

Were
using this strong profit and cash generation to invest in capabilities that
differentiate IBM and accelerate the development of new market opportunities,
areas weve discussed in the past, like business analytics, and Smarter Planet,
and cloud computing.

Now
weve just closed a strong third quarter consistent with the momentum in our
business throughout 2009, and were well-equipped going into the fourth
quarter. Now, lets get into the details of the third.

This
quarter we delivered $2.32 of earnings per share, up 18 percent year to year. This is a record level of EPS for a first,
second or third quarter, adjusting for stock splits.

We
generated over $4 billion of cash from operations, and ended the quarter with $12.5
billion of cash on hand. And we returned
another $2.4 billion to shareholders, with $700 million in dividends and $1.7
billion of share repurchases.

With
this powerful performance we now expect to generate at least $9.70 of earnings
per share for the year, up 50 cents from our previous view of at least $9.20.

But
as you will see, margins are fueling our profit growth. Ill discuss how our transformation is
driving this  but it is the shift to higher value, globally integrating our
business, and our ongoing productivity initiatives that led to significant
margin improvement. We expanded our
pre-tax margin by 4 points. Thats our
best margin improvement in almost four years, when we divested our PC business.

This
quarter, our strategy and business model together delivered high levels of
profit in a tough economic environment.

A
key point here is that our model delivers improved margins, even when revenue
growth is a headwind. So when revenue
growth becomes a tailwind, the operating leverage weve created will really
come through  and continue to drive our earnings.

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Were
using this financial strength to invest in new areas that will help drive the
next growth cycle for our clients, areas like Smarter Planet, business
analytics and cloud computing.

This
quarter we delivered $1.70 of earnings per share, which was up 4 percent year
to year. This positions us well to
achieve our objective of at least $9.20 of earnings per share for the year.

We
generated $1 billion of free cash flow  up $450 million.

We
ended the quarter with over $12 billion of cash on hand, and we reduced total
debt by $3 billion.

We
returned another $2½ billion to shareholders  with $700 million in dividends
and $1.8 billion of share repurchases.

Weve
done a lot of work over the last decade to transform the company, shifting to
higher value areas, globalizing our business, and constantly working to improve
efficiency. Ill give you a few examples
of how the changes weve made have positioned us to deliver this performance in
a challenging economic environment.

First,
with a focus on higher value offerings and strong services capabilities, we can
adapt our offerings to deliver what clients are looking for. Today, clients remained focused on trying to
save cost and conserve capital. Our
services signings reflect our ability to meet these needs.

Total
signings were up 10 percent at constant currency, with 27 percent constant
currency growth in our longer-term categories.

Second,
the actions weve taken have dramatically shifted the mix of our business  and
our profit model has less dependence on hardware, which is more vulnerable to
economic conditions. In fact, this
quarter effectively all of our pre-tax profit came from software, services and
financing. The annuity nature of these
businesses provides a solid base of revenue, profit and cash.

Third,
we have been investing to capture the opportunity in the growth markets. Our constant currency revenue growth in these
markets remained about 8 points higher than in the major markets.

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Finally,
weve had an ongoing focus on driving productivity in all parts of the
business, from sales efficiency to supply chain management to service delivery
to global support functions. The result
of this work is to reduce our fixed cost base, and therefore improve the
operational balance point.

Bottom
line, we have built a more resilient business model, and one that generates
more profit from each dollar of revenue.

IBMs transformation positions us well for 2009, but more importantly, our model provides the
cash we need to invest in new areas that will help drive the next growth cycle
for our clients. In addition to our
growth markets investments, we have three other key initiatives.

First, is our Smarter Planet
strategy, where governments, utilities and businesses are applying intelligence
to the key processes of the world. This
allows clients to create more value and long term economic growth from their
infrastructure investments.

The
second new opportunity is Business Analytics, which leverages our broad
capabilities to optimize our clients business performance by applying
analytics to their business processes.
Were already working on advanced analytics projects with a diverse set
of clients including TD Bank, MTN South Africa, the New York State Department
of Tax, and The Sentinel Group.

And
third is Cloud Computing, an emerging model for delivering and consuming
IT-enabled services.

Each of these three opportunities requires enterprise
software, deep industry process knowledge, and solution integration
capabilities where IBM is very strong.

And we will leverage our cash position to be opportunistic
to accelerate our progress in the areas we believe will fuel growth and
competitive differentiation in the future.

Well spend more time on these initiatives in our
investor briefing in the middle of May.
But for now, Ill get back to our first quarter performance.